5 Important Things to Know About Crypto Before Investing
Depending on whom you ask, there seem to be two camps when it comes to crypto. One half of people think it’s the best thing in the world, while the other half thinks it’s a made-up currency with no real value.
I don’t fall into either of these two buckets, and frankly, neither should you.
Whether you’re looking to invest in the space or trying to learn more, you should know that there’s actually no single definition of what crypto is and how it works.
Here’s my take. As the crypto market enters its second decade, one thing is clear: crypto and blockchains are not going away. With a combined market cap in excess of $350 billion, crypto is a dynamic new asset class with the potential to disrupt industries and create entirely new ones. How will it all unfold? No one truly knows, but the possibilities are big—and exciting.
What To Know About Crypto
To help you understand this new asset class, here are five important points to know:
1. Crypto is more than a currency.
Despite what its name suggests, cryptocurrency isn’t just a currency. For instance, when was the last time you heard of someone buying a coffee with bitcoin? I’d guess never. Instead, think of crypto as a technology that brings money into the internet era.
Here’s one example of crypto’s groundbreaking ability as a technology: Today, if you were to wire $10,000 internationally, it would take two to four business days, with a fee between one and four percent. By comparison, you could send $1 billion using the bitcoin blockchain almost instantly for less than a few dollars. Who wouldn’t prefer that?
2. Blockchains have the potential to change banking forever.
Crypto uses a new kind of technology called a blockchain. Think of it as a shared database operating on thousands of computers around the world through code. These computers use one public ledger to record incoming and outgoing transactions so anyone can send, receive, or transfer value over the internet without the need of a bank or other third party. For some, this breakthrough may seem small, but it becomes monumental when you consider this: For the first time in history, there’s a method to move money or property instantly and securely without the need for a middleman. That’s a big deal.
3. Crypto gives us a new way to own digital goods.
The creation of digital property rights is another use case of blockchain technology with huge potential applications. Non-fungible tokens, or NFTs, allow you to own digital collectibles without an intermediary saying you own it. Instead, a digital certificate of ownership is minted to the blockchain where it’s tracked and traced between buyers and sellers. Today, NFTs are mostly used to represent digital items like music, art, and virtual real estate, but their potential goes far beyond. Think about paper-heavy industries like real estate. What if you could skip the paperwork and transfer property rights over the internet in just a few minutes? With NFTs, you can.
4. Picking winners can be complicated.
Right now crypto is like investing in the early days of the internet. Twenty years ago, I would never have guessed that the iPhone would surpass Blackberry. Or that Google would dwarf Yahoo. In the same way, today there are more than 10,000 different crypto assets, each with different strengths, vulnerabilities, and use cases. The point is, crypto is early and the space is evolving, so it’s extremely difficult to know which assets will succeed long term. In some ways, trying to predict the precise winners and losers is like throwing a dart in the dark.
5. Take a broad approach.
My strategy? Take a more balanced approach, and consider holding a diversified index of the leading crypto assets or crypto equities. A well-constructed index can help you capture the industry winners over time. It’s like betting on the broader market instead of its individual parts. Because as the saying goes, it's better to be generally right than precisely wrong. However, like any emerging sector, the space can be volatile, so it’s extremely important to be thoughtful in your research. For starters, I would recommend consulting with a professional financial advisor before making an investment. A well-informed advisor can help you strategize around your personal diversification needs so you can find the right balance in your portfolio.